The Economist magazine recently published a special report on the world economy, looking at the ‘problem’ of low inflation. More than ten years have passed since the beginning of the Global Financial Crisis and Great Recession, and inflation is now strikingly low in many rich economies. This is despite unemployment falling to historically low levels in countries such as the US, UK and Germany, although it remains much higher in a number of European countries that have yet to recover from the worst of the eurozone crisis.
Normally economists expect wages to rise faster as unemployment falls below some critical level and the labour market tightens, and at some point this has tended, at least in the past, to lead to higher inflation.
In the US and UK, wage growth has been picking up, but inflation has remained low, and has even undershot central banks’ inflation targets. Wage increases are relatively good news for workers after a decade of sluggish or stagnant earnings growth, but remain weak compared to those seen prior to the recession. Continue reading →
In the wake of Donald Trump’s call for lower US interest rates in the midst of solid economic growth and low unemployment, The Economist magazine ran a couple of articles on the threat of populist leaders to central bank independence (CBI) and low inflation.
It is more than 40 years since the publication of the intellectual justification for CBI of Finn Kydland and Edward Prescott, propounding the idea of time inconsistency. Based on the concept of the natural rate of unemployment (NRU), political control of interest rates will give rise to the temptation for politicians to boost aggregate demand and lower unemployment in the short run, below the NRU. This will prove unsustainable over the longer run, merely producing higher inflation, with inevitable costs to economic efficiency and growth.
This was apparently what caused the stagflation of the 1970s, when unemployment and inflation rose together, undermining the putatively Keynesian Phillips curve. The upshot is that politicians and voters are better off with CBI, with the central bank given a fixed mandate of low inflation and autonomy in how it achieves this.
But what is the reality of CBI and monetary policy? Here are some quotes from heterodox economists critiquing the mainstream consensus. Continue reading →
Despite a brief revival, the world economy is slowing again. A more sustained recovery will require international cooperation to reduce external imbalances in a way that reduces unemployment and maintains low inflation.
This post explores the role of the role of internal and external balance (or lack thereof) in helping us find a return to a more sustainable prosperity. These ideas form much of the theoretical content of The Leaderless Economy by Peter Temin and David Vines, which was published in 2013.
So do we need another policy scheme for restoring global prosperity? I would argue that we do. Global growth picked up in 2017 but, apart perhaps from the US, has begun to falter recently, not least in the UK, but also in continental Europe. Many economies have accumulated high levels of private and public debt, and have made little progress in reducing them. Continue reading →
An interesting interview with Robert Pollin on the Real News Network, in which he discusses the possibility of achieving full employment under capitalism. He considers the ideas on this subject of Marx, Keynes, Kalecki and Friedman.
For me, the historical record seems to support the ideas of Kalecki and Marx, in that achieving full employment may be possible, but sustaining it is much more difficult. This is because it tends to change the balance of power in society in favour of the workers, which the employers don’t like. If high inflation or a squeeze on profits is to be avoided, a new bargain between employers and workers is necessary.
The solution is thus a political one, and leads to a different kind of capitalism. It may be possible for a while but, once again, history suggests that this is hard to sustain, and that a squeeze on profits will result, leading to a slowdown in investment and growth and subsequently to a rise in unemployment once again. This also lends support to the ‘classical’ ideas of Anwar Shaikh on wages and unemployment, which I discuss here.
Last week I posted several times on Modern Monetary Theory (MMT), a set of ideas which seems to have plenty of support, or at least generates plenty of debate, judging by its presence on the internet.
MMT is an offshoot of post-Keynesianism. The policies which flow from its main theses suggest that a wise and benevolent state can ‘print’ money, within certain limits, to achieve full employment and moderate inflation.
Some MMTers also support an Employer of Last Resort (ELR) function for the state too. In other words, the state should provide a job at a set wage for all those who want one, so that full employment can be sustained even when economic growth slows or the economy goes into recession. The ELR policy was supported by Hyman Minsky whose ideas have also influenced MMT. He saw it as a more productive alternative to forms of welfare which pay people while they are inactive in terms of formal employment. Continue reading →
A short video featuring L. Randall Wray, one of the leading proponents of Modern Monetary Theory. He discusses the reasons why economists and politicians struggle to understand it, and why non-economists, particularly those working in financial markets, apparently do not have this problem.
Towards the end, he mentions policymakers’ fears regarding the potential for inflation, which I shall return to in the context of MMT in a future post.
This nine-minute interview with left-Keynesian economist Dean Baker discusses the wisdom or otherwise of the Federal Reserve’s interest rate hikes and their effect on jobs and wages. He notes that despite a low unemployment rate in the US, other measures of the ‘tightness’ of the labour market indicate that there may be more slack in the system and more room for job creation than allowed for by the Fed.